I’m a big believer that passive income is the secret to financial freedom. Building a diversified portfolio of high-quality income stocks can generate a steady second income and make your money work harder for you.

Clearly, the starting point has to be finding companies with a high dividend yield. Growing profits and strong, consistent cash generation are also great attributes to look for.

Of course, buying an undervalued stock would be a bonus to help to boost long-term returns.

What am I watching today?

Lloyds (LSE: LLOY) is one boring FTSE 100 stock that I like at the moment. The company’s Q3 2026 results released on 29 October showed a 42% increase in statutory pre-tax profits to £6.6bn for the first nine months of the year, while return on tangible equity jumped to an impressive 17.9%.

The bank generated £11.1bn in underlying net interest income, up 10% year on year at a healthy margin of 3.21%. Management remains on track to deliver its full-year targets, including net interest income exceeding £14.9bn and a cost-to-income ratio below 50%.

Meanwhile, its Common Equity Tier 1 (CET1) capital ratio stood at 13.3% at the end of September, providing a solid capital buffer and supporting shareholder returns through dividends and share buybacks.

What about the dividend income?

Of course, Lloyds isn’t without risks. A prolonged economic downturn could trigger rising loan defaults, while falling interest rates could squeeze lending margins and weigh on profitability. Nonetheless, analysts remain optimistic with consensus estimates forecasting earnings per share (EPS) tipped to climb from 9.9p in 2026 to 13.7p by 2028.

Meanwhile, dividends per share are forecast to rise 42%, from 4.31p to 6.12p over the same period. With a projected earnings payout ratio of around 45% in 2028, those distributions appear well supported by profits.

So what could a further £30,000 investment deliver? At today’s (6 November) 4.18% dividend yield, I’d initially receive £1,254 annually. Based on the current 95.9p share price and analysts’ dividend forecasts, that could increase to around £1,914 by 2028, even without reinvesting a penny.

Looking further ahead, reinvesting dividends at an average 4.18% annual yield over 30 years could grow a further £30,000 investment today to around £102,483. That’s £72,483 in accumulated dividend returns, excluding any share price appreciation.

The enlarged investment could then generate around £4,284 in annual passive income, assuming the same yield.

Of course, neither earnings growth nor dividends are guaranteed. But I think Lloyds’ improving profitability and potential for growing shareholder distributions make it an attractive long-term income candidate.

Is Lloyds undervalued?

I also think Lloyds’ shares look attractively priced against their future earnings potential. Using analysts’ forecasts of 13.7p in earnings per share by 2028, I’ve calculated a potential fair value based on a price-to-earnings (P/E) ratio of 10 — broadly in line with Lloyds’ average valuation over the past three years.

That implies a future share price of 137p. Discounting this back to today’s money at an annual rate of 10% gives me a fair value of around 113p. Against the current 95.9p share price, this suggests the stock could be around 15% undervalued.

Of course, this depends on the bank meeting analysts’ earnings forecasts and maintaining its valuation multiple. A weaker UK economy or rising loan defaults could derail those expectations, as could changes to bank profit taxes.

Still, with a dividend yield of 4.18% alongside potential capital gains, I think Lloyds is just one stock worth considering for long-term income and growth investors.

Should you invest £5,000 in Lloyds Banking Group Plc right now?

When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Lloyds Banking Group Plc made the list?

Ken Hall owns shares in Lloyds.